The Fed has really backed itself into a corner as they walk the tight rope looking to aid in growth and fight inflation. Unfortunately, by lowering rates to assist in growth they have, in effect, fueled inflation by weakening the greenback. Whether it be inflation or stagflation the price of raw materials are moving higher, as investors you should have 5-20% of your portfolio positioned to take advantage of higher commodity prices as we believe this is an ongoing theme for at least the next few years. Stop blaming speculators and become one, make commodities a part of your portfolio.
The USDA reduced its estimate of 2008 beef production from 26.83 to 26.57 billion pounds and increased the average price estimate of choice steers from 91 to 92.5 cents per pound. After months of protests, South Korea is officially open to import U.S. beef from cows that are 30 months or younger. After the close Friday, the USDA estimated the week's beef production at 533.7 million pounds, up 1.0% from a year ago. In the markets, August feeder cattle was virtually unchanged still trading on both sides of the 50 day moving average. It appeared the market was breaking out, but we ran into stiff resistance at 114, which will need to be penetrated before we make it to higher ground. We will be buying setbacks looking for higher prices to come. August live cattle lost a little over 2 cents on the week closing at the 50 day moving average of 101.25. As we said last week, we would look to add length closer to 102 and being that prices are a bit lower, you could lightly buy live cattle, but if forced to choose between the two, we prefer longs in feeder cattle.
The USDA increased its estimate of 2008 pork production from 23.38 to 23.48 billion pounds and kept the average price estimate of barrows and gilts at 47 cents per pound (63.5 cents lean). Pork production was estimated at 426.7 million pounds, up 10.4% from a year ago. Lean hogs along the curve started trending higher last week which bodes well for our recent purchases of October and December for clients (see recent commentaries). We are positioned long via futures and options and expect to see a stair step higher in prices into the fall. As we forecasted, we filled the gap from 2 weeks ago with October gaining just better than 2 cents, our next target is 73.50. December put on just under 1 cent and should make its way to 77 on this leg.
Corn: Weekly export sales showed 337 t.m.t. of corn was sold last week. Friday’s USDA monthly crop report put ending stock at 833 million bushels vs. 673 the month prior and the average guess of 820 m.b. It‘s all weather and its impact on determining the final yields. We will need ideal growing weather to not drive ending stocks to crop rationing levels. The government cut expected yields to 148.4 b.p.a. vs. 148.9 last month. Because of late plantings and reseedings, a report on August 12th will have final planted acreage numbers. Traders should be acquiring longs ahead of that report. If we see rain, December futures could pull back to 6.75 which would serve as the 61.8% Fibonacci retracement. A close on December under 7.00 sets up a test of 6.75 and potentially 6.50. On the daily charts we are oversold and it would not take much to see this market reverse and track higher. We are buying $8 calls for clients and lightly getting long the futures; first we expect to see the gap filled from last Monday’s open at 7.47 and then a trade back to the highs. We still expect weather to be an issue and think that the report in August will give corn one more push before the highs are in.
Beans: Weekly export sales showed 66.4 t.m.t. of beans were sold last week. Friday’s USDA crop report showed 2008 ending stocks at 125 m.b. unchanged from last month and 2009 ending stocks at 140 m.b., down from 175 the month prior and pre-report estimates of 139 m.b. Like corn, soybeans too have no room for error in terms of weather for the next 2 months as stocks are tight. November beans were down 19 cents on the week, but this was after a 60 cent washout. As we said last week, we prefer the long side and would be buying dips, the closer to $15 the more aggressive we feel you could be. For now support comes in at the 20 day moving average at 15.56 followed by 15.27. We would recommend adding to length on a close above $16. Outside of just trading soybeans we also like soy meal. December meal should be supported at last week’s low 386.00, as we expect new contract highs and a potential run to 450. Look at the 480 strike for around $2000.
Wheat: Weekly export sales showed 617 t.m.t. of wheat was sold last week. It is a bullish demand signal as millers and exporters chase badly needed supplies. Demand should remain strong through the spring harvest. Friday’s crop report put all wheat production at 2.461 b.b vs. pre-report estimate of 2.478, soft red wheat at 607 m.b. vs. last month’s of 572. Hard red winter wheat production was at 1.040 b.b. vs. 1.030 last month. Spring wheat production was 507 m.b. vs. 537 last month. The USDA said that global wheat production will hit a record high 664 million tons in 2008-2009, a big improvement from last year's drought-stricken crop of 611 million tons. September CBOT wheat has support at 8.00 and with the chart looking oversold we could get a bounce to 8.40/8.60. Last week we failed to get thru the 40 day moving average on a closing basis and would need to see a settlement above that level for me to be convinced higher prices are to come. September KCBOT lost 18 cents last week, but for now the downside may take a rest. We would be cautious putting any size on because there is a gap on the chart below at 8.28 from late May that we expect to be filled, but if last week’s lows hold we could see a bounce. On a trade above the 50 day moving average; 8.72, look for prices to track back to the $9 level.
Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Before trading MB Wealth recommends that you should carefully consider your financial position to determine if commodity trading is appropriate for you. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results. There are no guarantees of market outcome stated, everything stated above are our opinions. Calculations of profit and loss have not factored in commissions and fees.